Employment Allowance (EA) is a relief available to eligible employers in the UK, allowing them to reduce their annual national insurance contributions (NICs) by up to £10,500 (£5,000 up to 2024/25). However, where companies are under common control, or are 'connected', specific rules apply that may limit or restrict eligibility.

One of the key points to consider is that the allowance applies per employer and not per PAYE scheme. This distinction becomes crucial when examining companies or businesses with shared ownership.

An employer can generally claim EA if:

• They are a business or charity.
• They pay Class 1 employer NICs.

However, the allowance is not available if:

• The only employee is a director (unless there are multiple employees earning above the NIC threshold).
• They are a public body or do more than 50% public work (some exceptions apply).

Read more in this article

Associated Companies Rule

One of the more complex areas of the Employment Allowance relates to connected or associated companies. HMRC uses the concept of ‘connected companies’ to prevent businesses from fragmenting their operations artificially to claim the allowance multiple times.

As explained within HMRC guidance:

‘Where more than one company is under the control of the same person(s), only one of those companies may claim the Employment Allowance.’

This rule ensures fairness and compliance, particularly where individuals control multiple businesses with separate PAYE schemes.

Control

Control is defined by reference to the ability to direct the company's affairs. HMRC follows the same criteria as for corporation tax associated companies:

• A person has control if they can exercise, or are entitled to acquire, direct or indirect control of the company’s affairs.
• This includes ownership of share capital, voting rights, or rights to income or assets.

The concept also includes ‘connected persons’ such as spouses, civil partners, or business partners, meaning that indirect control through close relationships can bring companies within the scope of the associated rule.

Connection is established on the first day of the tax year – so for example, if two or more companies (a limited liability partnership is treated as a company for this purpose) become connected during a tax year, they will each continue to be entitled to the employment allowance for the remainder of that tax year, but will only be entitled to one employment allowance from the beginning of the following tax year. Any unused allowance cannot be transferred.

Conversely, if two or more companies were already connected at the start of the tax year but become independent of each other during the tax year, they still only have one employment allowance for the remainder of that tax year but will each be entitled to an employment allowance from the beginning of the following year.

It is important to note that only companies can be connected to other companies, and only charities can be connected to other charities. There is no provision within the rules for a company to be connected to a charity. Likewise, sole traders and traditional partnerships (excluding limited liability partnerships) cannot be treated as connected to one another or to a company for Employment Allowance purposes.

When multiple businesses are involved, and all are under common control, it may make sense to:

• Allocate EA to the company with the higher NIC bill.
• Centralise payroll through one employer if eligible.
• Keep clear and contemporaneous documentation of control and structure.

Example

Let's say Jane Smith owns company A which provides design consultancy services with three employees and company B operating as a marketing agency with two employees.

Each company has its own PAYE scheme and pays Class 1 NICs. Jane is the sole director and shareholder of both companies. Both companies will be considered associated companies as Janes controls both companies directly, hence only one of the companies can claim the Employment Allowance in a tax year. Jane must nominate one of the two companies when claiming through their PAYE scheme via HMRC's Basic PAYE Tools or payroll software. HMRC does not require justification for the choice, but only one company can claim.

What if the ownership is split?

Suppose John and Mary, a married couple, each own 100% of the shares in separate businesses:

• John owns Company X.
• Mary owns Company Y.

Even though the companies are separately owned, HMRC will treat them as connected due to the couple’s relationship, unless it can be clearly demonstrated that there is no substantial influence between the businesses. If John and Mary genuinely operate independently (separate premises, no shared clients/staff, independent finances), then a case could be made for separate claims. However, HMRC is likely to scrutinise such arrangements.

Record-keeping

A business must keep any records that relate to their EA claim, for a minimum period of three years after the end of the tax year in which they claimed the Employment Allowance. The records must show:

• why the business was entitled to claim the allowance
• how much allowance was used or in some circumstances repaid
• what liabilities the allowance covered
• the decision to nominate a specific company
• the rationale for considering businesses as connected or not
• any correspondence with HMRC if applicable.

If HMRC later finds multiple claims from connected businesses, penalties and repayment may be demanded.

How to correct an error

If two connected companies have both claimed EA by mistake:

• Inform HMRC as soon as possible.
• Repay the allowance wrongly claimed.
• Correct past submissions via amended EPS (Employer Payment Summary) filings.

Misunderstanding the rules can lead to denied claims, repayments, or penalties.

Useful resources

HMRC guidance for Employment Allowance